Return on Invested Capital (ROIC)
Net operating profit after tax as a percentage of invested capital, measuring capital deployment efficiency
What is Return on Invested Capital (ROIC)?
Return on invested capital shows how much operating profit a business earns on all the capital invested in it, whether from shareholders or lenders. It measures how well a company turns capital into profit.
If ROIC is higher than the cost of capital, the business is creating value, and if lower, it is destroying it.
How this KPI is measured
- Function
- Finance
- Sub-function
- Financial Reporting
- Industry
- All Industries
- Type
- Lagging
- Impact
- Financial control
- Unit
- %
- Measurement frequency
- Quarterly / Annual
- Formula
- (NOPAT / Invested capital) × 100
How to calculate it
Divide net operating profit after tax (NOPAT) by invested capital, and multiply by 100.
For example, if NOPAT is 9,000,000 and invested capital is 75,000,000, ROIC is 12%.
Compare with the weighted average cost of capital. If ROIC is above it, investment is earning more than it costs.
Where it is used
Judging value creation
Compare with the cost of capital.
Allocating capital
Direct money to high-return uses.
Comparing businesses
Benchmark peers.
How to improve it
Tips and common mistakes
- Definitions of invested capital vary. Be consistent.
- Look at trends, not a single year.
- Use alongside growth and margin.
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